in 1988 Greenspan, unilaterally, declared that "Banks" (Wall Street -too big to fail banks) could engage in the buying and selling of derivitives.Futures and options contracts are derivatives.
Lehman then filed a claim against AIG, its counterparty in trillions of notional derivitive value which became actual demand of payment.
That would only make sense if Lehman was betting against themselves.
Futures and Options contracts are not "over the counter derivitives". They are an unregulated private contract between two parties and even Greenspan has said he does not know how to regulate them. The are an etherial, self-delusional agreement between 2 parties which 'gives the appearance' of a no-lose investment. Bank of International Settlement puts the notional value of current derivitive contracts at about 1.5 Quadrillion dollars. The earth and all that is in it does not come close to the current dollar valuation of 1.5 Quadrillion. That is a number which is large, even to astronomers. As long as their value remains notional everything is fine, but when counterparty claims are made, it will be next to impossible to stop the carnage. Bernanke did stop it with the bailouts to AIG and the "to big to fail" banks. The next time, I fear, we will not be so lucky. Right now, the dollar is leveraged 20:1. That is how much debt that is out there. It cannot be fixed in a year, or 10 years or 50 years. It can only continue as long as the public remains ignorant about about these matters....and even then when the public realizes what politicians and the big banks have done only civic upheaval will come...but that will repair nothing.
Options and Futures are leveredged products, but they are highly regulated. They are not the problem. They have margin calls to right a failing position, or in the case of options, the options expire worthless, and the seller derives the benefit. Not so for over the counter derivitives.
That would only make sense if Lehman was betting against themselves.Lehman was basically filing a claim on the "derivitive insurance agreement" so Lehman could collect enough money to pay its demand requirements. It was the law of the jungle of Sept 16 and Lehmans was only concerned with Lehmans. What is Insurance if it is not a contract to protect against an adverse outcome of yourself. Homeowners,collision, life insuance....all are cased when something bad happens to you.